Wednesday, March 02, 2011

"There is danger for him who taketh the tiger cub, and danger also for whoso snatches a delusion from one who trusted false promises."

My longtime friend and fellow iconoclast G.F.B. recently observed that the U.S. is in the throes of a historically unprecedented loss of faith in the implicit promise that life will be better and easier for future generations. G.F.B. cited Arthur Conan Doyle's conclusion to his Sherlock Holmes' story, A Case of Identity, as the encapsulation of the dynamic we will collectively experience.

In the story, a young woman's secretive lover, Hosmer Angel, fails to appear on their wedding day. Mr. Angel turns out to be a fictitious character, a duplicitous ploy designed to access the young lady's substantial income. Holmes declines to reveal this sordid truth to the young lady, and offers this explanation to Dr. Watson:

"If I tell her she will not believe me. You may remember the old Persian saying, "'There is danger for him who taketh the tiger cub, and danger also for whoso snatches a delusion from a woman.'"

I am rewriting the line slightly to apply to a nation drunk not on love but on financial promises which cannot be kept:"There is danger for him who taketh the tiger cub, and danger also for whoso snatches a delusion from one who trusted false promises."

The promises Americans cling to so adamantly and naively are many, both explicit and implicit. That the public employee pension will be paid in full. That Social Security will pay out "what I was promised." That Medicare will be able to fund $1 million+ for the last year of life interventions for ecah of the 65 million Baby Boomers.

Then there are the implicit promises. That the dollar will not go to zero. That there will always be gasoline at every gas station. That the gasoline won't cost $10/gallon (in today's dollars). That the government will remain in control of its own institutions (hahahahahaha). That the Central State, a.k.a. the Savior State will somehow "fix" whatever problems arise in the U.S. economy and society.

This list of promises, and thus the list of delusions about to be snatched, is long indeed. The key promise may well be the one identified by G.F.B.: that life will always get better and better in every way and every day for Americans.

The idea that life in the coming years will be more like an endless camping trip for tens of millions of people is not just anathema, it is not in the realm of possibility.

And so the tiger will lash out at those who snatched her cub. Americans are as naive and desperate as a young jilted lover: they've been stood up, but don't want to know that they have put their cherished faith in impossible promises. They cling with frantic energy to their delusions, and are ready to uncork anger to express their fear of a future stripped of quasi-religious promises. By that I mean Americans' faith in their Savior State is near-religious: most cannot grasp that the Savior State itself is not Too Big To Fail, but rather Too Big To Survive.

In Public Pension and Healthcare Costs and Financial Common Sense (February 28, 2011) I explained why the Savior State's promises to public employees--and by extension, all citizens--cannot be met: the cost of the promises is growing by 11% a year, year after year, regardless of which flavor of political parasite is nominally "in power," while the underlying economy is growing by 2% a year at best. In the past three years, it has not grown at all, but has been kept afloat by $6 trillion in Federal borrowing and spending.

That Federal spending has leaped 60% in a mere 6 years and 35% in a mere 3 years. Compare those growth rates with 2%, and you have to conclude the promises cannot be met, unless the Federal government prints dollar signs on toilet paper and ships everyone a roll as "payment for what you were promised."

Hence the popularity of the hyper-inflation meme.

But getting a roll of toilet paper in place of the $2,000 a month you were promised is still breaking the promise.

Here is the central delusion that will be snatched: that the U.S. is a wealthy nation capable of paying all its promises. In fact, the U.S. has been spending beyond its means for at least a decade. Here is what nobody wants to hear: The U.S. consumes more than it produces.

It's balance sheet and income statement are both negative.

The most readily accessible metric for this bleeding is the current account--the trade deficit or surplus. The U.S. has been running trade deficits that would have crushed any other nation long ago.

How have we managed to take so much more than we produce? This is not an easy concept to grasp, but in effect the U.S. has arbitraged its currency to the detriment of its trading partners and those accepting dollars as payment for real goods.

We can see this arbitrage at work in a 10-year chart of the DXY (dollar index):

By lowering the value of the dollar by one-third since 2001, the U.S. has extracted trillions of dollars in wealth from those who sold tangible goods in exchange for dollars.

As you can see on the chart, this arbitrage appears to be ending. The dollar is in a long-term uptrend, and is forming a pennant or megaphone pattern, which suggests a narrowing of trading range and an eventual breakout up or down.

If the pattern breaks down, then the dollar will be destroyed, as many expect. If it breaks out to the upside, as I expect, then the dollar arbitrage which has enbled us to live far beyond our means will be destroyed.

Either way, the dollar will no longer be a "secret" source of living beyond our means, consuming far more than we actually produce in the real world.

There is another phenomenon at work, one described in the tremendously vital 3-volume history of Capitalism by Fernand Braudel:

The specific tale I refer to is Venice, Italy, circa 1500-1700. Venice was once the dominant trading power in the European Mediterranean. Its wealth flowed from its vast merchant fleet and its dominance as a trading center for goods and trading debts/credit and gold/silver.

But over time, competition from other trading centers and merchant fleets erode the immense profitability of the trading sector, and the financial Elites of the city moved their capital into the more profitable domain of farming on the Italian mainland.

At that point, Venice lost its position astride the commercial/trading world and began its long slow decline to a tourist haven.

The U.S. is now on a similiar trajectory to decline, as its financial Elites have abandoned investing in productive enterprises and trade for the more profitable trade in financial duplicity and fraud, a.k.a. "financial innovative instruments" which arbitrage risk to the immense gain by the financial houses originating the arbritrage.

The game is simple: create instruments which supposedly lower risk, but which really only mask risk behind complexity. Then, when the trade blows up, the traders transfer the stupendous private losses to the taxpaying public via sovereign debt.

Once their debts and losses have been cleared, then they start the game over again.Why bother with risky productive assets when this financial gaming is so profitable and risk-free?

Indeed. And there you have the dynamics of decline: the immutable math of a slow-growing economy and fast-rising costs of promises, and a financial Elite which has abandoned productive enterprise in favor of financial manipulation and illusory "products."

You can't consume more than you produce for long, and that's the "promise" that will be broken: that we can heedlessly consume more than we produce forever, with no consequences.

And so we're left with the tiger's response to its cub being snatched: a mob enraged by the snatching of its delusions. Frequent contributor Harun I. neatly summed up this dynamic in a recent email, and it offers a sobering conclusion to this entry:

Outstanding post as usual. However, I found your request to check ideologies at the door quite amusing.

Forgive my cynicism, but these are the same people who would not run a spreadsheet or money management program (Quicken or such), or use a amortization calculator on the web to see if they could afford those exotic mortgages that are blowing up. These are the same people that while making the biggest financial decision of their lives would not spend the extra money to have an attorney examine and explain to them the documents they were signing. These are the same people who owned their homes but were easily convinced it was a strange sort of piggy bank that you had to borrow to pull the money out. These are the same people who found the SNL skit, If you Cannot Afford It, Don't Buy It, challenging.

Intellect and logic have left the building. These people are id driven. The suffer from the Copernican syndrome. No matter what proof you give -- no matter how mathematically irrefutable it may be, they will choose to believe that the earth is the center of the universe.

While they will all show up for a demonstration when their piece of the pie is on the line, if you were to sit them down with a state or municipal budget with the mandate to balance it, they would fail.

Everyone wants change so long as it doesn't effect them. Politicians who clearly understand that reducing spending to what is taken in as taxes would condemn to death many afflicted by conditions that are curable. They are not going to cut spending in any significant way.

And this is why it all must catastrophically fail.

History is very clear about ideologies and the legitimacy to rule. When governments could no longer feed them, even the most devout citizen was willing to drag their deified ruler from their palace and cut off their head. What god they may be offending at the moment was not even a fleeting thought.

In time, the legitimacy of the oligarchy to rule here in America will be questioned. It will be interesting to see how that plays out.

But as for any hope of rationality from the folks running around waving signs and like a belligerent Oliver demanding, MORE! because of the irrefutable facts you have given, I think you will be disappointed. In fact, were this a different time, they would be screaming heresy and demanding your Inquisition.

Thank you, Harun. I also received an email from a public employee proving Harun's point. This gentleman promised to "riot in the streets" if the promises made to him weren't kept.

If everyone who finds the promises made to them are being broken responds by "rioting in the streets," then we can anticipate roughly 300 million citizens all rioting in the streets at the same time, all seeking someone to blame for their loss, someone, anyone but themselves.

NOTE: I am occupied this week with a messy plumbing job, so email replies have dried to a trickle. Your forbearance is greatly appreciated.

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